Lecture Notes for Saving and Investment in Open and Closed Economies

08.02.2023 Lecture Notes

Relationship between Saving and Wealth
individual wealth - the amount of their holding of assets (e.g. stocks, houses) minus their
liabilities (e.g. loans)
national wealth is the same thing but for countries



A country with a high saving rate will accumulate national wealth over time.



Private Saving
private saving - private disposable income minus consumption expenditure



private disposable income:
Yd = Y - T

Y - GDP
T - net taxes (taxes - gov. transfers - interest payments on debt)



private saving:

Sp = Y - T - C
C - consumption expenditure


private saving rate is the proportion of private disposable income that is saved:

Sp / Yd



Government Saving

government purchases consist of:

government investment (Ig)




08.02.2023 Lecture Notes 1

, government consumption (Cg)

G = Cg + Ig


government saving:

Sg = T - Cg

or Sg = T - G

budget surplus occurs if T>G, and a budget deficit (dissaving) occurs if T<G



National Saving

national saving - the sum of private saving and government saving:

S=Y-C-G



national saving rate:

S/Y


Policy and Practice: Government Policies to Stimulate Saving

governments stimulate saving through:

tax consumption (e.g. value-add tax - tax paid by a producer on the difference
between what it receives from the sales minus the costs)

provide tax incentives for saving

increase return on saving

reduce budget deficits



Uses of Saving

Uses-of-saving identity:

S = (C + I + + NX) - C - G = I + NX

S = I + NX


or as the net capital outflow identity:


08.02.2023 Lecture Notes 2